Amazon Q4 Earnings Preview: Supply Chain Constraints To Pressure Margins

There hasn't been much excitement around Amazon.com (NASDAQ:AMZN) stock over the last 52 weeks. During that period, shares of the e-commerce giant have lagged other mega-cap technology stocks and the broader NASDAQ 100, with the stock dropping 11.3% year on year. Shares closed on Wednesday at $3,012.25.

AMZN Weekly Chart

Investors are concerned that escalating spending and supply-side hurdles are increasingly weighing on earnings. Amazon warned in October that it could have sales of up to $140 billion in the busy holiday quarter with the possibility of making zero profit.

These factors are likely to reappear when the Seattle-based company releases its fourth-quarter numbers later today.

Amazon expects operating income in the three months ending Dec. 31 to be between break-even and a $3 billion profit, down from $6.9 billion a year ago.

New Chief Executive Andy Jassy faces a critical challenge, keeping millions of Amazon Prime customers happy, as supply-side hurdles, labor supply shortages, and increased freight and shipping costs spread globally.

But while the current environment doesn't look too favorable for Amazon's e-commerce business, investors shouldn't ignore the powerful momentum in the company's other units, including its advertising segment and gains from Amazon Web Services (AWS), the company's cloud unit.

Sales for the cloud unit, which offers customers server capacity and software tools and generates a significant portion of the company's operating profit, have been showing massive growth. Numbers indicate a 39% growth in Q3 compared with the same period a year ago.

Amazon's digital advertising business, which competes with Alphabet's (NASDAQ:GOOGL) Google and Meta Platforms (NASDAQ:FB), grew by 50% in Q3.

Analysts Still Bullish

That's the main reason that most Wall Street analysts remain bullish on the company's long-term prospects and its leading position in e-commerce. Morgan Stanley last month released an optimistic note on Amazon, predicting a 30% gain for the stock.

Bank of America, meanwhile, named Amazon its top pick for 2022 in its note, saying Amazon should enjoy a "significant" expansion in profit margins from 2023 to 2025, helped by its cloud, advertising, and third-party marketplace.

Its note added:

"We continue to favor Amazon as our top FANG stock in 2022 with the view that 1Q will be a low point for growth and y/y margins."

Analysts' faith in Amazon stock is so strong that only 2 of 52 polled by Investing.com, gave it a "neutral" rating, while the rest rated Amazon "outperform," with a 12-month price target that on average implies a 35.7% upside.

AMZN Consensus Estimates

Source: Investing.com

Bottom Line

Cost escalations and supply-side hurdles may continue to pressure Amazon's margins for a couple of quarters. But this weak spell offers a buying opportunity for investors sitting on the sidelines, given the company's rapidly expanding revenue from its cloud and ad businesses, along with its still-dominant position in the e-commerce segment.